Gold Stocks at a Crossroad

Robert J. Cote, Jr.
Thirdeyeopentrades
May 2, 2006

Gold stocks have been on a tear since May 2005. Bull markets can be volatile and this one's no different. How much higher gold stocks can go before another significant correction is anyone's guess. We would like to share a couple of charts that we watch as the gold stocks continue marching their way through the three stages of the Golden Bull.

[click on chart to enlarge]

The above chart measures the strength of gold to the unhedged gold mining stocks. When the price trend is falling gold is weaker than the stocks and when rising stronger than the stocks. Since May 2005 the trend has been falling and a bullish falling wedge is apparent. We have labeled what we suspect are the five waves inside the wedge. One might speculate that, should the price break up out of the wedge, there could be a change in the trend whereby gold would become stronger than the stocks which implies an ensuing correction in the price of the stocks.

O.K., so that's the bearish view. We're not here to predict, merely to observe and act accordingly to what the market gives us.

We'll next cover the bullish view.

[click on chart to enlarge]

Here's a chart taken from a longer time frame and is the inverse of the previous chart we presented. The Golden Bull began in year 2000 and has come quite a long way since then. This chart plots the relationship of the unhedged mining stocks to gold. The bullish view would be that one would be watching for the price to break up through the resistance area of the channel. If it did that, a measured ABC up move would target .90, which would result in a significant rise in the price of mining stocks in relation to gold.

This is why we think that the gold stocks are currently at a crossroads. There is a significant opportunity for a sustained rise upward. But, since we're unable to predict the future, we'll keep a watchful eye on things.

Robert J. Cote, Jr.

email: thirdeyeopentrades@yahoo.com
website: www.thirdeyeopentrades.com

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